Lockyer, Levy Are Clueless

Steven Greenhut: It’s shocking for the state’s highest-ranking finance officer to express such ill-informed views on economic competitiveness in California [California’s not broken]. State Treasurer Bill Lockyer and fellow author Stephen Levy, a liberal economist who believes in higher taxes and more government spending, don’t think that California having the eighth-highest corporate income tax rate matters for investment. Apparently, state competitiveness and incentives for entrepreneurship and investment are not influenced by having the third-highest top personal income tax rate in the country. But, of course, these taxes do matter and explain why California is performing so poorly, particularly when compared to our potential or compared to many other states. Tax rates and the state’s regulatory climate matter.

In the liberal worldview, though, everything is static. People are sheep who don’t respond to incentives and disincentives. The government raises tax rates and we all supposedly work just as hard and invest just as much. Tax-hike advocates believe that government is the source of wealth. Levy has a long history of arguing that California’s future is dependent on “investing more” and raising taxes. No wonder Jon Coupal of the Howard Jarvis Taxpayers Association calls him “an avowed enemy of Prop. 13.” Yet this is the economist our state treasurer believes offers the right take on California’s situation.

Lockyer and Levy seem to miss the word “despite.” California is not a total basket case despite economic and regulatory policies from Sacramento that seem designed to push top wage earners and businesses to friendlier economic climates. Beyond blaming the economy, Lockyer and Levy blame the state’s taxpayers. They write, “Californians have to assume more responsibility for deciding what they want government to do and how much they’re willing to pay for public services.”

Read that line carefully. It’s the same false choice we’ve been referring to here at CalWatchdog — the choice between more services or higher taxes. We know what Lockyer and Co. choose. Lockyer has often made some sensible observations about the state’s economy in the past, so perhaps he is merely trying to bolster the bond markets, as Wayne Lusvardi argues in an article today. Still, Lockyer’s argument is weak and a bit scary. If the state’s leaders don’t believe California’s government has a fundamental problem, then there’s no chance that they will attempt to fix it.

The authors don’t mention the many ways state government misspends taxpayer dollars and how Sacramento officials overspend no matter how the economy is doing. The authors’ implication is that the state government is lean, and that California is suffering from problems that are not under its control. They ought to talk to business owners who must deal with California’s notoriously ham-fisted regulatory agencies. In the authors’ view, the state seems to be a mere victim of economic circumstance. The real solution is for taxpayers to “assume more responsibility” for their decisions, they argue. But what about the responsibility of state officials such as Lockyer, who have spent their careers passing legislation and managing the state budget? Don’t they bear much responsibility for the state’s budgetary and economic mess?

Furthermore, Lockyer and Levy misstate the default risk, as my PRI colleague economist Jason Clemens points out. “The risk is not that the state will actually default,” he said. “The risk is that the cost to California in terms of relative interest rates will increase, which means more state revenues have to go to paying interest on debt instead of actual programs and services.” While debt service is a senior obligation, the refusal of state officials to deal with pension liabilities and other long-term debts means that other programs must be cut or taxes must be raised. I suspect the latter proposal is what this column was all about, which gives Californians some insight about how the state’s leadership plans on approaching its intractable self-imposed budget problems. The column will make state government insiders feel better about themselves and the work they do, but it ought to offer a clear-sighted warning to taxpayers and business owners that nothing is going to change in Sacramento.

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Quoting …”While debt service is a senior obligation, the refusal of state officials to deal with pension liabilities and other long-term debts means that other programs must be cut or taxes must be raised. ”

The key words in the above quote are …”the refusal of state officials to deal with pension liabilities” …. and more specifically the word “liabilities”.

Yes, the underfunded pension “liabilities” are a BIG BIG problem. But to really SOLVE the problem, we need to address the ROOT CAUSE … excessively generous pensions formulas (combined with WAY too young retirement ages, inclusion of COLAs, and allowing assorted spiking and gimmicks to boost one’s pension).

It would free up a GREAT DEAL of money to pay for truly important services if ONLY our elected representatives would find the courage to “do the right (and VERY necessary) thing” ….. change the State Constitution, Laws, Regs., (whatever) to allow a VERY significant (50+%)reduction in pension accruals for FUTURE years of service for CURRENT (yes CURRENT) employees.

But first, they’ll have to climb out of the Union’s pocket….. anybody got a ladder ?

Perhaps the proper new tax to balance the California state budget would be a 100% income tax on public sector pensions paid to people under the age of 70 (no matter where they currently live) plus a 100% income tax on public sector pensions in excess of $50,000 per year at any age.

But to really SOLVE the problem, we need to address the ROOT CAUSE … excessively generous pensions formulas (combined with WAY too young retirement ages, inclusion of COLAs, and allowing assorted spiking and gimmicks to boost one’s pension).

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#1) Across the board cuts of 25% to ALL gov employees making above $100K in total comp (more than 50% since the state average comp is $110K). As total comp goes down lower the % cut to their overall comp.

#2) Raise retirement ages to 67 for all gov employees.

#3) No more than a 1% multiplier for DB pensions, give a DC pension with a match up tp 3% of pay as a secondary pension.

#4) FREEZE the salary at the current level for 5 years minimum, re-evaluate at the end of 5 years-if the economy is STILL BAD (which is very possible) keep salaries frozen for another 5 years. Repeat.

It is obvious that you can have the same services at less cost if you just have the guts to address the pension promises for PRESENT workers-(new workers is just a ruse..we wont live to see the results). It would be like if i put a new Land Rover in my driveway and i told my family that they would just have to work more hours or that they would have to transfer from Cal Tech to a community college. There is another choice that is not being presented but it takes guts

Actually, I think defaulting on the bonds could eventually be on the table if the yearly payments — currently $6 billion from the general fund — get too high, even as the overall budget doesn’t grow. Unlike all the numbers Lockyer and Levy throw at us, deciding on a default is a political decision. If interest rates get so high that politicians realize they won’t get any future bonds, they might decide to default on the older bonds. Especially if foreign governments in Europe start defaulting.

An insolvency that INCLUDES wiping out at least 50% of the accumulated pension liability would be great for California …. an ALSO fair to both taxpayers AND Civil Servants … as the 50% lost is effectively the “extra” negotiated in bad faith due to Union money & support. The latter portion should NEVER have been granted in the first place.

A bond default could be a definite possibility, but there will be extraordinary pressure brought to bear to prevent such a thing, since it would give a severe haircut to the people and institutions that hold them. Existing pension obligations will still have a payment precedent at least equal to and in some cases exceeding the obligations to bond holders, so that’s not really an avenue out of the problem either.

Like it or not, fewer services and/or higher taxes are inevitable if anyone is really serious about deficits and debt.

Existing pension obligations will still have a payment precedent at least equal to and in some cases exceeding the obligations to bond holders, so that’s not really an avenue out of the problem either.
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The state can pay it debt’s in any order it wishes-the state is soverign, it makes it’s own rules and is accountabel to no one.
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Like it or not, fewer services and/or higher taxes are inevitable if anyone is really serious about deficits and debt
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A tax increase is definitely NOT going to happen, just won’t in this economy and with gov employees getting comped on average $110K per year, three times the average state comp of $40K for private sector workers.

Perhaps with the new year you’ll realize that those you call “haters” only want a degree of fairness ……. meaning that as long as Civil Servants receive equal or better CASH pay (as 95+% do today), there is ZERO justification for better pensions ….. 80-90% of which is paid for with TAXPAYER contributions (and the interest generated therefrom).

You call those who rightfully object to being financially raped by Civil Servants “haters”. WE consider you extremely greedy.

“Perhaps with the new year you’ll realize that those you call “haters” only want a degree of fairness ……. meaning that as long as Civil Servants receive equal or better CASH pay (as 95+% do today), there is ZERO justification for better pensions ….. 80-90% of which is paid for with TAXPAYER contributions (and the interest generated therefrom).”

A fair is where the best pie or the fattest pig gets the blue ribbon. Of course in law it is bound by contract. And after I receive my salary and have deductions for retirement and the state pays in some of that money it is any longer taxpayer money. It belongs to me and the State at the moment is paying 19% into Calpers not 80-90%. This is totally fallacious reasoning. I hope you know that or your employer might convince you he owns your house. After all you bought it with his money.

Dear Rex
“The state can pay it debt’s in any order it wishes-the state is soverign, it makes it’s own rules and is accountabel to no one.”
Please share what you have been smoking.
Also, the sovereign state is accountable to the United States Constitution, particularly the Contracts Clause.
Of course California could attempt to secede from the Union.
In fact 30 years ago I would have agreed.

What I said was that of your total pension’s cost, the share paid for (NOT with YOUR contributions) but by those from your employer (meaning the TAXPAYERS) is (with the interest earned therefrom) is 80-90%.

Charles, I attended the CalPERS sponsored CA Dialogue in LA on Feb. 12, 2010. We had a question and answer period, where I learned that the State of CA’s total yearly liability to CalPERS is 2.5% of its total budget. I am guessing that your 19% figure is the percentage of a state employee’s salary that goes to CalPERS, before it becomes part of the total budget.

TL: You must be receiving your public services in NJ. I provided good services to the public when I was working for a muni, and I can say the same for services I received from the State of CA employees, including the DMV.

Anyone who professes that a public retiree’s pension should be taxed at 100% is not playing with a full deck.

What NEEDS to be done (besides a huge decrease in the Gov’t workforce via outsourcing) is a significant reduction (50+%) in pension accruals for FUTURE years of service for CURRENT Civil Servants.

And yes, I’ve heard all the arguments that it’s not legal ….. but with 99% of those opining as such being on the receiving end of pensions from similar Plans and hence having a Big conflict of interest, we’ll have to see how this shakes out in the courts (hopefully Federal, not just State) when accompanied by declarations of fiscal emergency.

TL: I did see the program, and I believe the statement that Steve Croft made, saying that the State of CA spends more for pensions than it does funding the entire State of CA University System, has to be a wrong statement. I believe it is an outlandish claim. I have not had the chance to check that statement out, yet.

I do not know why you keep blaming union money for the pension problems. The pension plan does not get any money from unions. It gets the same amounts of member fees from union employees as it does from non-union employees. And, all of the $100,000+ Club members are former, highly-paid managers, who did not belong to unions.

My former entity pays the premium for my ABC medical coverage, which acts as a supplement to Medicare. It is not a vested right like my pension–it is a result of the collective bargaining process involving active employees. I realize I could lose it whenever they decide to vote it out. I am sorry that my former entity does not negotiate with the insurer in a manner different from the current. How could anyone agree that, for ABC to charge the over-65 retirees more for supplemental coverage than it charges for active employees is beyond me. ABC’s responsiblity for a portion of my medical services is pennies on the dollar, compared to what is paid out by ABC for the active employees.

SeeSaw, You Said …”I do not know why you keep blaming union money for the pension problems. ”

Lets step through this …

My point is that the root cause of the Pension crisis is Excessive benefits. I say that (they are excessive) BECAUSE, with Cash Pay alone now equal to or better in the Public (than Private) Sector, there is no justification for better (primarily Taxpayer-funded) pensions AT ALL, let alone pensions that are typically 4+ times more valuable in Public Sector jobs.

So why do Public Sector workers still have such excessive pensions ? It’s BECAUSE Public Sector Unions, via campaign contributions and members’ election support (or threats to support the oposition) have corrupted the election process to put in place ONLY those who will support the Union’s efforts for more pay, bigger pensions, and bigger benefits.

Of course even MORE at fault are the self-serving, contribution-soliciting, vote-selling politicians who gladly participate in such deals.

The apathy and low voter turnout among Private sector workers is partly at fault as well.

My former employer is the subsidizer of my medical premiums. ABC could care less what portion of my medical premium is subsidized by my former employer. The premium for those under age 65, active or retired, is the same. ABC charges a larger premium for retirees over age 65, and it only supplements the Medicare coverage, which amounts to pennies, in comparison with the medical services it provides to the active employees and retirees under age 65, for a less premium.

I don’t fully understand what you are saying. If ABC is the Insurance company and actually “on the risk” for possible losses, (as opposed to just “administering” the Plan on behalf of your old employer … and paying claims with the employer’s money) they will charge premiums commensurate with that risk.

To make a long story short. When the insurance company is on the risk, Active workers are in one big group, and retirees are generally in a SEPARATE group.

The former is generally younger and healthier, while the latter is older and sicker.

Hence even for much LEES coverage, the premium can be HIGHER in the Retiree group.

Now if the employer is “on the risk” with ABC only administering the plan on behalf of the employer, ABC couldn’t care if the employer groups the actives and retires together or not. If they’re grouped together with the same premium, you effectively have the actives subsidizing the retirees. Looks like that is NOT the situation in your case.

TL “inclusion of COLAs, and allowing assorted spiking and gimmicks to boost one’s pension” California miscellaneous employees cannot spike their pensions. Colas are always after the fact, meaning the money is worth less and then the State makes it up after the fact. Meaning the State makes money on this deal. Colas do not cost or give more money, they merely reflect the current value of the dollar. So give that one up.
” change the State Constitution” No you have to change the US Constitution. And you can’t pick out only certain contracts. You would have to make ALL contracts void. Imagine the chaos that would cause.

Leon0112 says
“Perhaps the proper new tax to balance the California state budget would be a 100% income tax on public sector pensions”
What a brilliant idea! And how about a 100% tax on private pensions and social security? You should have come up with a plan for yourself instead of wanting to rob others.

Tough Love says:
December 23, 2010 at 9:19 am
John,
An insolvency that INCLUDES wiping out at least 50% of the accumulated pension liability would be great for California …. an ALSO fair to both taxpayers AND Civil Servants … as the 50% lost is effectively the “extra” negotiated in bad faith due to Union money & support. The latter portion should NEVER have been granted in the first place.

Gee, where is the rest of my money? I got 13% out of AB400. If you can find a legal way to steal it, good for you Robin Hood. Except I bet you would steal and then give to yourself. Oh, and the State cannot go bankrupt.

The state can pay it debt’s in any order it wishes-the state is soverign, it makes it’s own rules and is accountabel to no one.
Come on there fake Rex. The US Constitution trumps California law any day of the week. You would have to get rid of Article One to pull that one off. Who are you kidding?

Tough Love says:
December 23, 2010 at 11:08 pm
Charles,
You should slow down as you read … it helps with comprehension.
What I said was that of your total pension’s cost, the share paid for (NOT with YOUR contributions) but by those from your employer (meaning the TAXPAYERS) is (with the interest earned therefrom) is 80-90%.

Once again I state that once I get paid, they money is mine. Your employer does not own your house because you bought it with money he paid you. This is a nonsensical idea. Perhaps you should slow down. At the current moment the State pays in 19% of payroll into retirement. In 1969 they were paying in 18%. Why were you not complaining then? Perhaps because at the time you were making 50% more in salary?

Perhaps with the new year you’ll realize that those you call “haters” only want a degree of fairness ……. meaning that as long as Civil Servants receive equal or better CASH pay (as 95+% do today), there is ZERO justification for better pensions

So for 37 out of 40 years public wages were behind private by 30 to 40% and now with the recession private has taken it in the shorts, we should do something about pensions? Okay, give me the salary I would have gotten in the private sector and take the pension. I will come out way ahead.

TL: The problem I have with ABC is the fact that they have virtually no risk, and they charge a higher premium for my supplemental coverage than they charge employees and retirees who are under age 65. All of the risk after age 65 is on Medicare. This is all a result of a Supreme Court decision that came down three years ago allowing insurance companies to set the over age 65 group apart from those under 65. Companies like ABC took advantage of that decision, but many other insurance companies did not, so far.

CalPERS states publicly, on its website, that it has sufficient funds to pay benefits now and well into the future. Therefore, I resent the naysayers, like yourself, who are trying to scare the bejesus out of retirees.

TL: CalPERS states publicly, on its website, that it has sufficient funds to pay benefits now and well into the future. Therefore, I resent the naysayers, like yourself, who are trying to scare the bejesus out of retirees.

Seesaw, If I understand Medicare correctly, they pay 80% (of approved charges) and you pay the 20% balance.

When I say “on the risk”, I mean that they may have to pay claims in excess of the premium charged. If you incurred $500K in charges for a very major illness, the insured (you) would have to pay 20% or $100k, certainly WELL in excess of Supplemental Policy premiums charged. Remember, an insurance company is not being benevolent. Unless they are a non-profit they are in the business to make profits for their shareholders. Even non-profits play hardball with those WITH insurance….. they’ve got to do so to cover charity care where the gov’t doesn’t even cover marginal costs of the service provided.

And yes, there was a …” decision that came down three years ago allowing insurance companies to set the over age 65 group apart from those under 65.”

When you step back, there are generally reasons behind these decisions. In this case, with Private companies rightfully complaining of the enormous cost of insuring retirees, they essentially threatened to pull ALL retiree coverage (for those below age 65 and NOT yet eligible for Medicare, as well as for those already medicare eligible) unless the gov’t compromised by allowing them to treat those already eligible for Medicare differently from those not yet eligible.

The gov’t, knowing that loss of coverage for retirees not yet
65 would be catastrophic, allowed the change. You may not be aware, but it is now perfectly legal to ONLY give retirees under age 65 coverage, with NOTHING for those 65 and over. Sometimes half-a-loaf is better than no loaf at all.

And in the holiday spirit, I wish you well and agree that the likelihood of pension reductions (with the possible exception of a reduction in COLA increases) is quite low for some time. That’s likely also true for pension benefits already accrued for current workers.

I do believe that there is more than a small likelihood of pension accrual reductions for FUTURE years of Service for CURRENT workers. Notwithstanding the legal issues (especially in California), “knowing the math” leaves few other options short of massive outsourcing ….. or eventual default.

The State of California is a sovereign government. It can not go bankrupt under federal laws but it can default or re-schedule it is debts.

A state tax on pensions would not work. Under federal law and court rulings, a state can NOT tax pension benefits of a person residing in another state even if the pension was “earned” in the prior state. California could have such a tax but literally all pensenors would leave the state. This is already one of California’s many problems as retirees leave the state.

California will keep the game going as long as it can borrow more money than it needs to pay back. At some point, interest rates will rise and California will not be able to borrow in the bond market. This will create a crisis and the most likely result will be loans or loan guarantees by the Federal Reserve or the US Treasury.

TL: My Verizon land line has been down, off and on, for three weeks, and I am still waiting for them to fix–it happens every time it rains. Then, I can’t use the computer. A Verizon rep hung up on me this morning, because I got upset when she told me she couldn’t send anyone until Jan. 20. I do believe that Verizon is private industry–you would never get such lousy service from a public employee, or any public muni.

Regarding the Medicare: All medical entities sign contracts with the insurer they deal with. Most sign with Medicare, but then some Doctors don’t accept Medicare patients. Right now, my Medicare supplement insurer, ABC, does not have a contrct with my hospital of choice PVHMC in Pomona, because ABC has, according the the hospital, refused to pay what it owes. All bills presented to both Medicare and a second insurer are several times higher than the contract stipulations, that were agreed upon between the provider and the insurer. Before my spouse and I were retired and on Medicare, my spouse had an angiogram at the hospital. The hospital billed ABC, our only insurer at the time, $20,000 for that procedure, which involved the procedure and his being in the hospital for about 8 hours. Of course, ABC threw out a major portion of the bill, and only paid what was agreed in the contract between the two entities. Right now, since we are retired and required use Medicare as our primary insurer:

If I go for a Dr. visit, Medicare and ABC are both billed for $146. Medicare only pays whatever was agreed upon in the contract, and ABC pays a grand total of two dollars and a few cents–the ABC premium to supplement Medicare is $700+ per month. I think that such a premium for supplemental insurance is criminal.

Anyway, TL, have a nice New Year. I will not be communicating again until I get back to a Libary, or until Verizon decides to provide some service for my home, land line.